Finding Safe Harbor from States’ Consumer Fraud Statutes

Consumers and state attorneys general have recently sought to raise claims involving consumer fraud statures against pharmaceutical manufacturers. Device makers may soon be facing similar charges.

This article discusses cases in which pharmaceutical manufacturers successfully used safe harbor provisions to defend against claims brought under a state's consumer fraud statute. The authors note a dearth of reports for which a medical device manufacturer asserted a defense using a safe harbor provision for a state consumer fraud case. However, medical device manufacturers have successfully raised other defenses against a variety of consumer fraud claims. This article examines those defenses and discusses lessons learned from pharmaceutical cases that use safe harbor.

Consumer Fraud Statutes—Causes of Action

Consumer fraud statutes (generally codified as a “Deceptive Trade Practices Act,” a “Consumer Fraud Act,” or a “Consumer Fraud and Deceptive Business Practices Act”) are currently enacted in every U.S. state, ostensibly to protect the public from unscrupulous business practices. Courts have upheld application of consumer fraud statutes to permit suits against groups in various industries including the following:

• An attorney for alleged misconduct for deceptive advertising.1

• An investment adviser group for allegedly risky fund management.2

• An insurance carrier for alleged failure to investigate and settle the underlying claim against the insured.3

• A car dealership for alleged failure to disclose to a purchaser that a car had previously been involved in an accident.4

The statutes vary with respect to the specific conduct regulated, the type of recourse available to consumers, and the amount of civil penalties that may be levied against violators. What all these statutes have in common, however, is the potential to be quite costly to those engaging in unfair or deceptive business practices as defined by state legislatures.

Approximately 25% of consumer fraud statutes merely state that unfair and deceptive business practices are prohibited, leaving more-specific rules and regulations to the attorney general or other designated authority. Florida's Deceptive and Unfair Trade Practices Act is typical of this kind of statute. It says that “unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.”

Most states identify particular prohibited practices, specifying as few as 10 to as many as 52 unlawful activities. These lists are usually nonexclusive. The statutes either explicitly state that “prohibited conduct” includes but is not limited to the enumerated activities, or the list itself has a catch-all provision for unfair or deceptive practices.

Only five states (Colorado, Idaho, Kansas, Nevada, and Wisconsin) impose a “knowing” or “willful” requirement as an element of the violation, although language may be necessary for an individual to recover damages or attorneys' fees and costs. Typical prohibited actions include the following:

• Passing off goods or services as those of another.

• Causing confusion or misunderstanding as to the source, sponsorship, approval, or certification of goods or services.

• Causing confusion or misunderstanding as to the affiliation, connection, or association with, or certification by another.

• Using deceptive representations or designations of geographic origin in connection with goods or services.

• Representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, quantities, or qualities that they do not have or that a person has sponsorship, approval, status, affiliation, or connection that he or she does not have.

• Representing that goods are original or new if they are deteriorated, reconditioned, reclaimed, used, secondhand, or altered to the point of decreasing their value or rendering the goods unfit for the ordinary purpose for which they were purchased.

• Representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another.

• Disparaging the goods, services, or business of another by false or misleading misrepresentation of fact.

• Advertising goods or services with the intent not to sell them as advertised.

Damages

Nearly every state permits an individual to pursue a cause of action against an offender to recover monetary damages. States that do not permit monetary judgments against offenders do permit injunctions or declaratory judgment actions to proceed under the applicable consumer fraud statute. In addition, individuals in Arizona, Iowa, Nevada, and North Dakota generally do not have private right of action (although the elderly or disabled do have a private cause of action, and the general public may, under more-specific consumer fraud provisions, such as cancellation of a contract).

Plaintiffs attempting to recover damages usually only have to establish that the statute was violated and that it resulted in monetary or property damage. A few states are more permissive and only require a showing that the plaintiff was “adversely affected” or “suffers any damage.” Other states are slightly more stringent and limit recovery to “any person who purchases or leases goods or services primarily for personal, family, or household purposes and thereby suffers any ascertainable loss of money or property as a result.” A few states impose procedural hurdles, such as requiring that the plaintiff first provide written notice and an opportunity to cure or make a written tender of settlement. Mississippi requires the plaintiff to first submit to an alternative dispute resolution process. Those plaintiffs seeking only an injunction are usually subject to even more lenient requirements, often needing only to show that they are, or are likely to be, aggrieved by the violation.

Treble damages are frequently permitted if there is evidence of bad faith or that the violation was knowing or willful. Less frequently, statutes permit treble damages without a showing of bad faith if the judge, in his or her discretion, believes such damages are appropriate. In North Carolina, the statute actually requires the judge to award “treble the amount fixed by verdict” if the statute was violated, even without any finding of bad faith.

A few states permit punitive damages, and virtually all states permit, and on occasion require, that attorneys' fees and costs be awarded. Civil penalties may also be imposed, ranging anywhere from $1000/violation up to $40,000/violation, with many states setting a maximum civil penalty of $10,000/violation. There is also the potential for significant additional penalties if the victim was a senior citizen or disabled person.

Safe Harbors

Despite the dangers identified above (i.e., plaintiff's relatively low burden of proof and the potentially serious damages that may be awarded), nearly every state provides one source of protection for defendants: a safe harbor. Safe harbor exempts conduct that is in compliance with, authorized, or otherwise permitted by state or federal statutes, rules, and regulations.

Consumers and state attorneys general have sought to raise claims involving consumer fraud statutes against manufacturers of pharmaceuticals and medical devices with greater frequency. Often, these suits involve allegations that manufacturers' claims of safety or efficacy are false and misleading to the consumer. For example, although the district court in Scott v. GlaxoSmithkline Consumer Healthcare, L.P. ultimately dismissed the complaint on procedural grounds, it did note that the lawsuit could proceed under the Illinois Consumer Fraud Act if plaintiffs could show that the company's advertising actually deceived them.5

An efficient and effective means for defending against these consumer fraud claims is to seek safe harbor protection. Safe harbor exempts defendants from liability when the disputed conduct or communication complies with existing law. In a medical device or pharmaceutical case, it is essential that the defendant show that the conduct in question was authorized by FDA.

In a medical device case involving a prosthetic knee device, a federal court held the safe harbor provision of the Michigan Consumer Protection Act barred plaintiff's claim. The court's analysis focused on the fact that the sale of the device was authorized by FDA, “regardless of whether the specific misconduct alleged is prohibited.”6 In dismissing the consumer fraud claim, the Peter court held that because the manufacturer was “specifically authorized to sell the prosthetic knee at issue, even though Plaintiff alleges that the device was defective, the MCPA does not apply.”

Otherwise, the dearth of reported decisions regarding consumer fraud claims and use of safe harbors against medical device manufacturers is attributable to the less extensive direct-to-consumer marketing campaigns for medical devices.7,8

Data suggest that budgets for direct-to-consumer advertising of pharmaceutical products greatly outweighs the money spent for marketing medical devices. For instance, consumers may be familiar with specific pharmaceutical brands to treat conditions such as seasonal allergies and acid reflux, but are less familiar with the different options available for implantable medical devices. Current trends indicate that marketing of medical devices is on the rise, and it is easy to understand how such cases and claims can be brought against device manufacturers.9 For example, a plaintiff could argue that any informational brochure, promotional piece, or television advertisement touting the relative efficacy or safety of a particular device over a competitor (or even over a different modality of treatment) constitutes a “false or misleading” statement. Such an argument might be sufficient to trigger consumer fraud protection under the statute.

It may be worthwhile for device manufacturers to examine the use of safe harbors in cases involving pharmaceuticals. For example in Duronio v. Merck the Michigan Court of Appeals applied the safe harbor to exempt the defendant from liability.10 In its decision, the appellate court explicitly recognized that FDA is vested with the power to enforce regulations regarding prescription drug advertising of Vioxx. This was an affirmation of the trial court's dismissal of the plaintiff's consumer fraud claim. The Duronio court ultimately found, “[b]ecause the general marketing and advertising activities underlying plaintiff's MCPA claim are authorized and regulated under laws administered by FDA . . . [t]he trial court properly dismissed plaintiff's MCPA claim.”

Similarly, Bober v. Glaxo Wellcome PLC et al. illustrates the workings of a consumer fraud complaint and the protections afforded by successfully invoking safe harbor protection.11 In a class action lawsuit, the plaintiff argued that the manufacturer of Zantac provided consumers with false and misleading information about the substitutability of various dosages of Zantac, which is a violation of Illinois law. The specific complaint concerned the company's statements regarding two formulations of Zantac (75 mg for the over-the-counter [OTC] formulation and 150 mg for the prescription formulation). The plaintiff was prescribed 150 mg of Zantac, which cost more than an equivalent dose of the OTC formulation. Therefore the plaintiff claimed because the active ingredient was the same for both formulations, these were readily substitutable. The plaintiff's complaint was that company statements, which did not recommend or suggest substituting the cheaper OTC formulation for the prescription formulation, were false and misleading.

No Safe Harbor

The following states' consumer fraud statutes don't have safe harbor:

Arizona

California

District of Columbia

Iowa

Kansas

Maryland

Mississippi

Missouri

New Jersey

North Carolina

North Dakota

Pennsylvania

Vermont

West Virginia

Wisconsin

The Seventh Circuit Court of Appeals examined the Illinois Consumer Fraud Act (ICFA) as well as Illinois case law regarding the ICFA's safe harbor. The court determined that the allegedly deceptive statements were exempt because they were both adequate as a matter of law and technically compliant with existing federal regulations. Specifically, it recognized that the “pharmaceutical industry is highly regulated, both at the federal level and internationally,” and further stated that Glaxo Wellcome's statements were a prudent attempt to convey truthful information technically in keeping with the differing regulations. The regulations permitted marketing of OTC versus prescription pharmaceuticals.

In 2003, Schering-Plough Corp. and two other defendants faced a lawsuit for direct-to-consumer marketing regarding Claritin.12 Plaintiffs claimed Claritin advertising contained false claims regarding the medication's efficacy, which thereby resulted in artificially high prices for the medication. The New Jersey appellate division affirmed the trial court's dismissal of the complaint noting that the disputed claims were not actionable under the consumer fraud statute.

The appellate division, however, went a step further and recognized “an essential difference between the pharmaceutical industry and others.” Specifically, the appellate division recognized with regard to pharmaceuticals, that the content of direct-to-consumer advertising is subject to constant FDA oversight. Echoing the exemption provided by the safe harbor provision, it noted “a pharmaceutical manufacturer's compliance with FDA regulations including regulations, relating to DTC [Direct to Consumer] marketing campaigns, may shield it in a failure to warn case.” This case is instructive because although the court specifically referenced the pharmaceutical industry as a target of heightened scrutiny with respect to its marketing campaigns, the court's reasoning may be adopted to benefit the medical device industry, which is similarly exposed to FDA scrutiny with regard to safety and efficacy claims.

Another instructive case is Prohias v. AstraZeneca, which provides a more recent example of effective invocation of safe harbor protection.13 AstraZeneca successfully defended against the plaintiffs' claims regarding the allegedly false and deceptive advertising for its product Nexium by invoking the safe harbor provision of Florida's Deceptive and Unfair Trade Practices Act (FDUTPA). Specifically, the district court's first ground for dismissing the plaintiffs' complaint with prejudice involved application of the FDUTPA's safe harbor. It found that the “promotional and advertising activity . . . is supported by the FDA-approved labeling . . . and thus is ‘specifically permitted' by federal law.” Therefore, advertising of the product in accordance with the parameters approved by FDA is paramount.

Preemption and Other Defenses

In addition to safe harbor, other defenses and issues should be considered in statutory consumer fraud suits. The most prominent of these alternative defenses is preemption. Preemption provides that federal laws and regulations take precedence over state laws and regulations in the same area.

Preemption defenses coincide with arguments that would be made in favor of safe harbor protection. The analysis under both is similar: the legality of the conduct in question is determined, in part, by whether a regulatory body has already reviewed the conduct and deemed it permissible. For example, in the Scott case, the court's analysis of whether Glaxo could invoke the safe harbor protection of the Illinois Consumer Fraud Act would hinge on Glaxo's ability to show that the Valtrex marketing was “specifically authorized” by FDA regulation. It is generally preferable to raise a state's safe harbor provision rather than argue preemption. Focusing the analysis safe harbor is likely more palatable to a state court than forcing it to hold that no jurisdiction exists in the face of preempting federal supremacy.

Preemption analysis concerning FDA's right and authority to determine whether a manufacturer may be liable for suit is further complicated because of a number of cases recently decided by the Supreme Court.14,15 It should be noted, however, that in the absence of claims that a medical device was not manufactured to its federally approved guidelines, medical device manufacturers have enjoyed success in relying on the express preemption provisions of 21 USC sect. 360k(a).16,17 Preemption is undergoing legislative review and may soon end with the medical Device Safety Act of 2009. The Act seeks to overrule Reigel v. Medtronic by permitting states to bring product liability actions against manufacturers.

In addition to considering safe harbor protection and federal preemption, it is important to also consider whether a plaintiff's statutory consumer fraud claim is vulnerable in other respects.

Pleading Deficiencies. In a suit between two competitor manufacturers of a heart monitoring device, an Illinois district court dismissed an allegation of violation of the Illinois Consumer Fraud and Deceptive Trade Practices Act. The court found that the claims were not sufficiently specific as to the nature of the alleged fraud.18

Plaintiff's Failure to Prove Proximate Cause or Damages. The New Jersey Supreme Court recently reversed certification of a class action under the New Jersey Consumer Fraud Act, noting that such a suit would require individualized proof of loss by each plaintiff, and thus would not be amenable for litigating as a class action.19

The Suit May Not Be Permissible as a Separate Cause of Action. In McDarby v. Merck & Co., the New Jersey Superior Court determined that the plaintiff's consumer fraud act claim could not stand on its own because such claims were subsumed by existing legislation codified in New Jersey's Product Liability Act.)20

Conclusion

Safe harbor statutes and other legal defenses are available to medical device manufacturers that face increasing risk for lawsuits. Manufacturers may learn directly from the litigation examples in the pharmaceutical realm to assess their current business practices.

Moreover, affirmative steps can be taken to further minimize the risk of lawsuits, particularly those making claims with direct-to-consumer advertising. In particular, device manufacturers must understand all federal and state statutes and regulations governing their products and advertising of those products. They should engage in advertising campaigns that are fairly balanced and truthful, and that are not misleading or deceptive And finally, they must educate prescribing physicians about the product's warnings and risks so that the physician in turn can share that information with the patient.

Acknowledgments

The authors would like to thank Elizabeth Chesler for her contributions to this article.